In the past three weeks, the NASDAQ 100 has experienced heavy sell-offs during multiple trading sessions, and the index entered correction territory on Friday after declining by more than 10% from its peak. Many investors are now concerned that the stock market could be headed for a full-blown meltdown…
When market corrections occur, stocks with subpar fundamentals that previously benefited from an excess of investor enthusiasm tend to fall the hardest. Consider, for example, NIO (NYSE:NIO), Sundial Growers (NASDAQ:SNDL), and GameStop (NYSE:GME). They’ve dropped by between 29% and 57% from their highs in the past quarter alone. Here are more good reasons why investors should avoid them for the time being.
The “Tesla of China” gained significant momentum in 2020, delivering 43,728 electric vehicles compared to the 20,565 it delivered in 2019. Similarly, its revenue more than doubled to $2.3 billion. So why should investors shun what appears to be a high-flying growth company?
The first thing to be concerned about is that this automaker is losing money at a prodigious rate. Last year, the company burned through $706.2 million. Even though that was down by 58.4% from its loss in 2019, I still don’t think it’s a good idea to pay 20 times revenue for the stock.
Second, the company completed a $3 billion secondary stock offering in December and issued $1.5 billion in convertible notes in January. Its streak of shareholder dilution will probably continue for some time.
Finally, NIO is (for now) a China-only brand, with no plans to sell vehicles on the U.S. market until after 2025. It designed its cars to cater to the consumer dynamics of its home country as well. Right now, its flagship vehicle, the ES8 SUV, has a 0 to 60 mph acceleration time of 4.4 seconds, costs around $67,783, has a maximum range of 310 miles, and takes about one day to charge fully. Even setting aside the range aspect, that isn’t really in line with what consumers in the U.S. and Europe are looking for in an electric vehicle.
This is especially true given its absurdly long charging time. It’s less of a problem in China, where the size of the population has led the government to impose road space rationing in some major cities. Hence, owners could simply leave their NIOs in the garage to charge on the days that they cannot legally drive on the streets.
In America, the vehicle’s charging time would render longer road trips impractical, which would turn off consumers. NIO does build its vehicles to allow owners to easily swap fully charged batteries for depleted ones at charging stations. However, that works in China because of the nation’s high population density. The cost of rolling out a nationwide infrastructure of battery-swap stations in the U.S. would be astronomical.
As a result, I wouldn’t touch NIO stock until it can prove that it solves the logistical problems that appear set to prevent its growth outside of the Chinese market. Investors looking for electric vehicle stocks to buy should turn towards players like Tesla instead.
2. Sundial Growers
Sundial Growers has taken full advantage of the high investor demand for cannabis stocks lately. On three separate occasions in February, the company launched rounds of equity offerings that totaled a staggering $1.164 billion. Its outstanding share count has grown from less than 200 million in September to more than 1.66 billion.
When companies tap into capital markets, what they plan to do with the newly raised funds is usually in line with their past return on equity. During the third quarter, Sundial’s revenue and net loss declined to 12.9 million Canadian dollars and CA$71.4 million from CA$33.5 million and CA$97.4 million, respectively, a year prior. A variety of business write-offs, inventory overflows, and asset impairments contributed to those losses.
In fact, the company’s gross margin amounted to…
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